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Shrinking Goods

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  • Daniel Levy

    ()
    (Emory University, USA; Bar-Ilan University, Israel; RCEA, Italy)

  • Avichai Snir

    ()
    (Department of Banking and Finance, Netanya Academic College, Israel)

Abstract

If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices don't change. We study a situation where producers adjust the quantity per package rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 20_13.

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Date of creation: Apr 2013
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Handle: RePEc:rim:rimwps:20_13

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Keywords: Quantity Adjustment; Cognitive Costs of Attention; Information Processing;

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  1. Richard H. Thaler, 2000. "From Homo Economicus to Homo Sapiens," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 133-141, Winter.
  2. Daniel Levy & Dongwon Lee & Haipeng (Allan) Chen & Robert J. Kauffman & Mark Bergen, 2010. "Price Points and Price Rigidity," Working Papers 2010-21, Department of Economics, Bar-Ilan University.
  3. Carlton, Dennis W, 1991. "The Theory of Allocation and Its Implications for Marketing and Industrial Structure: Why Rationing Is Efficient," Journal of Law and Economics, University of Chicago Press, vol. 34(2), pages 231-62, October.
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  6. Armstrong, Mark & Chen, Yongmin, 2007. "Inattentive Consumers and Product Quality," MPRA Paper 4797, University Library of Munich, Germany.
  7. Daniel Levy & Sourav Ray & Haipeng (Allan) Chen & Mark Bergen, 2007. "Asymmetric Price Adjustment in the Small," Emory Economics 0703, Department of Economics, Emory University (Atlanta).
  8. Warner, Elizabeth J & Barsky, Robert B, 1995. "The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 321-52, May.
  9. Raajpoot, Nusser A. & Sharma, Arun & Chebat, Jean-Charles, 2008. "The role of gender and work status in shopping center patronage," Journal of Business Research, Elsevier, vol. 61(8), pages 825-833, August.
  10. Swan, Peter L, 1970. "Market Structure and Technological Progress: The Influence of Monopoly on Product Innovation," The Quarterly Journal of Economics, MIT Press, vol. 84(4), pages 627-38, November.
  11. Lin Peng & Wei Xiong, 2005. "Investor Attention: Overconfidence and Category Learning," NBER Working Papers 11400, National Bureau of Economic Research, Inc.
  12. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-73, June.
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Cited by:
  1. Snir, Avichai & Levy, Daniel & Gotler, Alex & Chen, Haipeng (Allan), 2012. "Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity," MPRA Paper 42252, University Library of Munich, Germany.

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